Key facts
- US consumer price inflation excluding energy and food rose 0.3% last month, exceeding economists' expectations.
- Core CPI rose 2.4% year-on-year, while overall consumer inflation was 3.4%.
- Renewed hostilities in the Middle East have pushed oil prices above $100 a barrel.
- Traders are pricing in an 85% chance of a 25 basis point rate hike by the Federal Reserve at its September 15-16 meeting.
- The Bank of Japan is likely to raise interest rates by 25 basis points next week.
- Fed Chair Kevin Warsh previously stated the central bank may need to act if underlying inflation is not clearly moving toward 2%.
Hotter-than-expected inflation readings are likely to prompt the Federal Reserve to raise interest rates next week, according to economists and traders. The Bureau of Labor Statistics reported that U.S. consumer price inflation excluding energy and food rose 0.3% last month from the previous month, exceeding the 0.2% anticipated by economists. Annually, core CPI increased by 2.4%, while overall consumer inflation stood at 3.4%.
These figures, combined with a stronger-than-expected August producer price index and oil prices soaring above $100 a barrel due to renewed Middle East hostilities, suggest that inflation is moving in the wrong direction relative to the Fed's 2% target. Nationwide Chief Economist Kathy Bostjancic noted that rising energy prices could spill over into other goods and services and inflation expectations, leading her firm to anticipate a 25 basis point rate hike from the Fed at its upcoming policy meeting.
The Fed has maintained its policy rate in the 3.50%-3.75% range throughout the year. Fed Chairman Kevin Warsh previously indicated that the central bank might need to act if confidence in underlying inflation moving toward 2% clearly and at sufficient speed could not be established. Economists believe the August data does not meet this threshold and may concern Fed colleagues who had anticipated cooling inflation.
Principal Asset Management chief global strategist Seema Shah stated that the core CPI print, coupled with rising energy prices and tensions with Iran, effectively guarantees a Fed rate hike next week. She added that policymakers will likely conclude that more than one hike is necessary to restore price stability after half a decade of above-target inflation.
Traders of short-term interest-rate futures are now pricing in an 85% probability of a quarter-point increase at the Fed's September 15-16 meeting, up from about 70% before the report. Inflation Insights' Omair Sharif noted that while a significant jump in wireless services contributed to the core CPI increase, the Fed may not be able to overlook the overall trend given the high odds of a hike.